THE HIDDEN DOWNSIDES OF TRADITIONAL ENTERPRISE SOFTWARE. vs. Software as a Service

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1 THE HIDDEN DOWNSIDES OF TRADITIONAL ENTERPRISE SOFTWARE vs. Software as a Service

2 INTRODUCTION In the past ten years Software-as-a-Service (SaaS) has gone from being a recently-coined term to a critical consideration in any discussion of new software. While the idea of SaaS first gained traction with the inflation of the dot com bubble fifteen years ago (Salesforce.com, for instance, was founded in 1999), neither the technology nor enterprises mindsets had developed to the point that SaaS was a serious consideration for enterprise solutions. As time passed, network and security technology improved and CIOs came around to the idea that they did not need to operate all of their software in the Traditional Enterprise Software (TES) model: installed and operated from on-premise servers. Throughout its adoption as a mainstream enterprise option, the value proposition of SaaS has not always been clear. Should an organization go the SaaS route to get quick access to the latest features? Was the real value in time and cost savings for IT departments? Or did SaaS compete against TES on some of its supposed weaknesses: reliability, security, and customizability? Now that there are hundreds of well-developed and highly adopted enterprise SaaS solutions being used by thousands of organizations just in the United States, the value proposition of SaaS solutions has become more clear. At the same time, the new SaaS model has had an interesting side effect: it has revealed a variety of hidden costs of TES solutions that were not typically considered in enterprise software selection decisions. As a part of our development process, MVP Innovation has conducted significant research into these hidden costs of TES solutions. We have found that these costs can be broadly lumped into four categories: installation, maintenance, scalability, and out-of-date inefficiencies. We have laid out the largest of these costs in the sections below. INSTALLATION TIME/COST From a technical standpoint, the installation may be the period during which the time and cost savings of SaaS over TES are most clear. The advantages arise due to the fundamental difference between the two types of software: SaaS is designed to be centrally scalable with a process resembling online new account creation while TES often requires the installation of new hardware (servers), installation of the software itself on those servers, and installation of client software on each individual computer that will be used to access the software. TIME Implementation of new enterprise software can be broken into three time periods: installation of the software, integration of the software with existing systems, and integration of the software with business processes. Looking at the implementation as a whole, our research shows that SaaS can reduce the timeline by up to 50%. One specific study of ERP implementations saw an average reduction of 37% with a reduction in time until recouping investment of 24% (Castellina 2012). The greatest structural reduction in implementation time comes in the installation period. For TES, the server purchase and set-up, along with the actual installation of the server-side and client-side software, can take weeks to months. These steps are made trivial by the business as 1

3 usual processes of the SaaS host. While the portion of the total implementation time dedicated to the installation varies widely (ranging up to around 80% for specific implementations), the result will be substantial time savings for any enterprise software implementation. While the structural advantage of SaaS over TES is less clear for integration into technical systems and business processes, the reality is that there are generally still appreciable time savings. Our research found two main causes: newness of the software and intentional design with the objective of minimizing implementation time. The first cause, newness of the software, is not a direct result of a specific software being designed as SaaS. Yet the reality is that the majority of new and innovative enterprise solutions being developed today are taking the form of SaaS. Those new and innovative solutions take advantage of the most up-to-date technical and business knowledge, naturally leading to a less painful integration into a state-of-the-art business. They do not have the burden of legacy requirements weighing down discussions on feature sets and built-in workflows. The result is a leaned-out solution that requires less time and expertise to implement. The second cause, intentional design with the objective of minimizing implementation time, is a remarkable mindset that has been adopted by SaaS developers. In acknowledgement that implementation time is one of the primary competitive advantages of upstart SaaS solutions over entrenched TES solutions, SaaS developers have enhanced the natural advantage of their solution by specifically designing for an even shorter implementation time. This can take many forms, including modularizing functionality sets and minimizing those available upfront, building more flexibility into technical system integration interfaces, and building in integrated workflow capabilities to ease the integration of the software into business processes. This all leads to an even more efficient solution that truly does minimize the time required to implement. COST While the time savings of implementing a SaaS solution are significant, the cost savings are downright impressive. Again, this is due to the fundamental model of the majority of SaaS solutions: license fees are not collected upfront but instead spread out over the useful life of the software. The result is that there is almost never an upfront cost to license the software. The only cost is for the 2

4 consultant time required to implement the software, which again is already substantially less than the time required for a TES solution, which is typically charged out at similar hourly rates. While upfront licensing costs do not typically account for the majority of the total cost of ownership (TCO) of a software solution, the SaaS savings are substantial easily reaching 6 to 7 figures based on the type of software being installed. This one-time savings helps organizations avoid bureaucratic capital expenditure negotiations and instead focus on what matters most: getting the right solution to solve the business needs. LONG-TERM COSTS One of the common arguments against SaaS is that the higher up-front cost of TES is balanced out by a higher lifetime total cost of ownership of SaaS due to the monthly licensing fee. In reality, this does not play out quite as expected. Indeed, because the upfront licensing cost can account for less than 20% of TCO, most TES solutions never see a time at which they become less expensive than SaaS solutions (Software-as-a-Service Executive Council 2006), with TCO for SaaS about 30% less than that for TES (Saugatuck 2009). One of the most obvious costs of TES realized after implementation is the so-called maintenance fee. The maintenance fee is justified in a variety of ways but typically covers available tech support and some basic level of bug fixes and upgrades. The experts we interviewed during our research indicated that these maintenance fees were typically assessed on an annual basis and average around 20% of the upfront licensing cost. Of course, most SaaS companies do not charge a maintenance fee; it is just a part of the simple monthly licensing cost. One of the greatest contributors to TCO and post-implementation costs is the in-house maintenance required to keep hardware and software up-to-date and running (most often taking the form of personnel). And yet, these costs are often not properly figured in to software buying decisions, even though they account for 75% of total IT budgets (Software-as-a-Service Executive Council 2006). This accounts for a significant portion of SaaS savings as hardware maintenance and the majority of software maintenance is carried out by the solution provider. One study of ERP implementations showed that the burden on IT personnel was about 30% higher for TES solutions than for comparable SaaS solutions. The gap is likely to be even higher for simpler systems. Many SaaS solutions are moving away from the TES model of charging additional license fees for large version upgrades. The industry norm has been a major upgrade approximately every two years (which may or may not require an additional license fee) and a completely new install approximately every five years (which does require an additional license fee). Many SaaS solutions are eschewing this model in favor of frequent small updates and fixes. Because updates are pushed out remotely, they can be applied on a nearly daily basis. The changes can be tested centrally by the SaaS provider, meaning little or no disruption to the software users business operations. SCALABILITY One of the often-overlooked advantages of SaaS solutions is their tendency to be more scalable than TES solutions. One of the primary reasons is non-structural: SaaS solutions are newer, designed with newer technologies and knowledge. Although this advantage is not intrinsic to the SaaS model, it still leads to an advantage in many cases. A significant portion of the scalability of a 3

5 given solution is fixed at the time of the programwasted Capacity for TES Solutions ming of the core framework. It is very difficult to fundamentally change scalability through upgrades or add-ons. TES solutions designed over five years CAPACITY 2 SERVERS ago were not designed with modern business needs in mind and will be unable to take advantage WASTE of the latest technologies. 1 SERVER The largest structural scalability advantage with SaaS solutions is the economy of scale WASTE DEMAND that SaaS providers can achieve. In the standard SaaS model, the provider is hosting the software for TIME all of its clients. In a hypothetical example, let s say that this leads to the provider operating 100 servers to meet its clients needs. Each of those clients may require less than a single server s worth of resources. If they were hosting the solution on premises (as Optimized Capacity for SaaS Solutions they would for the standard TES model), there would be substantial wasted server resource capacity across the entire network. If the demands of a CAPACITY SERVER farm single client increased such that they slightly exceeded the capacity of a single server, the client MINIMIZED WASTE would need to bring an entire new server online. The result is that SaaS providers can much better match server capacity against the precise needs of SYSTEM DEMAND their clients, minimizing wasted unused server capacity and cost (Rabetski 2011). TIME The SaaS scalability advantage is not simply a technical footnote. One survey that asked industry experts to rate the scalability of various enterprise solutions found that SaaS solutions were rated 50% higher for scalability than the top TES counterparts (Engebrethson 2012). VS. OUT-OF-DATE INEFFICIENCIES The inefficiencies generated by out-of-date versions of TES solutions are very difficult to quantify and, as a result, are often ignored. As mentioned previously, on average businesses conduct major upgrades of a software solution every two years and undergo a completely new installa- 4

6 tion once every five years. Although there may be revisions intermittently pushed out with minor upgrades and fixes, the cost to the business of implementing those revisions can be prohibitive. The result is that the average organization is months to years behind the software development curve. In fact, our research showed that in some cases organizations could be five to ten years behind due to the high cost of a new implementation. One study found that just over 50% of organizations operate with the latest version of a given TES solution at any given time (Engebrethson 2012). The costs of out-of-date inefficiencies are very real to organizations. Although the cost of lost functionality is difficult to quantify, the experts that we interviewed identified it as one of the largest downsides of TES solutions. In fact, rather than waiting years for major upgrades, many organizations will invest in customizations to give them the functionality they need on a quicker timeline. Of course, the costs for customizations are far higher and there is no economy of scale as the customizations are not generally incorporated into broader releases. The standard SaaS model has essentially eliminated the inefficiencies that organizations experience due to out-of-date software. Upgrades and new features are pushed out to clients as soon as they have been thoroughly tested. The result is a daily to weekly schedule of individual new features available for all users of the software. Functionality that may have taken years to reach organizations with TES solutions are available virtually instantly in SaaS solutions. Unrealized capabilities of TES solutions SOFTWARE CAPABILITIES LATEST DEVELOPEMENT SaaS CAPABILITIES TES CAPABILITIES TIME SOFTWARE LAUNCH TES UPGRADE TES UPGRADE Not only does this cut down on the inefficiencies of out-of-date software, it also allows for more rapid testing and further development. SaaS providers are getting quick feedback from live usage rather than relying on results in very limited and isolated testing environments. This enables a feature prioritization and development process that is highly responsive to the needs of the organizations, generating even more value with more relevant feature additions. 5

7 CONCLUSION Several significant factors in the broader SaaS vs. TES comparison fell outside the scope of this report. For instance, one of the largest traditional concerns with SaaS solutions is the security of hosting sensitive data remotely and transferring it over the internet. While our research hinted at the potential for SaaS to hold advantages even in these supposed weak areas, the question is far from answered and organizations are right to be concerned with such issues. For the sake of clarity in identifying the hidden costs of TES solutions, both the SaaS and TES models have been somewhat simplified in this report. In reality, there are many varieties of SaaS and TES solutions that will not all fit neatly in the frameworks that we have laid out. Many TES solutions can be hosted remotely to cut down on maintenance costs and many SaaS solutions (or at least sensitive data) can be hosted on-premises to mitigate security concerns. The models described in the report are simply the most prevalent. While our research clearly showed that SaaS solutions have clear advantages over TES solutions in many situations, this report is not intended as an exhaustive comparison of the two models. In all likelihood the appropriate model will depend on the specific business requirements in any given scenario. Over the course of our research we identified a variety of costs associated with TES that are often not fully considered by organizations when making decisions regarding adoption of new solutions. We see significant value in highlighting these costs in order to enable organizations to make better-informed decisions. SOURCES Alajbegovic, A.; Alexopoulos, V.; Desalermos, A. Factors Influencing Cloud ERP Adoption: A Comparison Between SMEs and Large Companies. Lund University. June Castellina, N. SaaS and Cloud ERP Observations: Is Cloud ERP Right for You? Aberdeen Group. December Engebrethson, R. Comparative Analysis of ERP Emerging Technologies. California Polytechnic State University, San Luis Obispo. May Rabetski, P. Migration of an on-premise application to the Cloud. University of Gothernburg. October https://gupea.ub.gu.se/bitstream/2077/29084/1/gupea_2077_29084_1.pdf Saugatuck Technology. SaaS Realities: Business Benefits for Small and Mid-sized Enterprises. October Software-as-a-Service Executive Council. Software-as-a-Service; A Comprehensive Look at the Total Cost of Ownership of Software Applications. September

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